Monday, 30 January 2012

A New Year but Nothing to Celebrate

The New Year is typically a time for celebration and a chance for many to start anew, but for the global economy, things look set to get worse in 2012 and the light at the end of the tunnel still seems a long way off. A slew of news items this week has highlighted this trend.

The International Monetary Fund (IMF) has lowered its forecast for global growth for 2012 to 3.3% compared to the 4.0% expansion which was predicted four months ago. More significantly, the new estimate for growth is less than the 3.8% for 2011 which means that things are going to get worse for many countries. Top of the list of those expected to have little to look forward to in the New Year is Europe. The IMF expects a 0.5% decline for the Euro area in 2012 with Italy and Spain predicted to suffer falls in GDP of 2.2% and 1.7% respectively. Things are even set to take a turn for the worse in Germany which grew 3.0% in 2011 but it only expected to eke out growth of 0.3% in 2012.

While certain circumstances in Europe, such as the turmoil surround government debt, are specific to the region, other drags on the economy such as cuts to government spending, high unemployment, and a lack of confidence are much the same elsewhere. Figures out this week for the UK showed that the economy shrank by 0.2% in the last three months of 2011 with unemployment at a 17 year high. The dip in GDP means that the UK could suffer a double-dip recession – a recession being technically defined as two three-month periods of negative growth with the double-dip referring to the economy being unable to build up sufficient momentum to recover from an initial recession and slipping back in a recession.

But perhaps the most depressing of news this week came from the Federal Reserve in the US who announced that it does not expect to raise interest rates until late 2014. This is good news for those borrowing money but for everyone else it is a signal that the US economy is not expected to register strong growth any time soon. It is also a sign of the desperation of central bankers who dislike publishing forecasts for interest rates and in so virtually committing to a target range of 0% to 0.25%.

Central banks everywhere are having to come up with novel ways of trying to boost the economy through monetary policy (the setting of interest rates or the money supply) as other options using fiscal policy (increased government spending or lower taxes) are limited due to high government debt. But central banks only have a limited arsenal and a promise to keep interest rates their current record low levels is one way to convince consumers and businesses to borrow but considering the lack of punch that the interest rate policy has had so far, central bankers will be setting much of 2012 and beyond coming up with new ideas on how to start providing us with better news.